Three advisers shed light on how their wealthy clients invest

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Canada’s richest people are a small but growing group that’s on track to control almost 70 per cent of personal wealth in the country. With at least $1-million each to plunk into a portfolio, these individuals tend to take a different approach to investing than the other 95 per cent of the Canadian population.

A recent survey by Tiger 21 LLC – a North American peer-to-peer network for investors with at least $10-million in investable assets – sheds light on how the wealthy are growing and preserving their money these days. Last year, according to the survey, Tiger 21 members allocated the biggest chunks of their investment portfolios to three asset classes: 28 per cent in real estate, 21 per cent in private equity and 19 per cent in public equity.

Fixed income and cash or cash equivalents each made up 12 per cent of members’ portfolios, while hedge funds and commodities accounted for the remainder.

“When you combine those top three asset classes, you’re looking at almost 70 per cent allocation to what I call equity, because we consider real estate as a form of equity risk,” says Michael Sonnenfeldt, founder of Tiger 21.

“If you look at a [historical] model where you have a 60-40 split of equity and bonds, what the survey results are telling us is that our investors have the highest exposure to equity that we have on record – a result of the current low-interest-rate environment where you really have to work your assets.”

How else do high-net-worth investors stand apart from those with fewer zeroes in their accounts? Three financial-services professionals who work with the country’s top 5-per-centers provide some insight into how the wealthy invest.

“Those who have created the most wealth over time have been, from my experience, able to maintain their investments through market cycles. They’re often invested directly in stocks but are able to detach themselves from the emotions of market gyrations. They have that ability to buy when the market is weak, and because they don’t foresee a need for that money in the short term, they have the ability to do this more than others.

“The investing styles of highnet-worth individuals tend to be characterized by a greater attention to the downside risk of investments than perhaps some others would be. Their interests tend to lie in larger-cap securities, and they want to know that the companies they own are going to be around. Those with some investment acumen will tend to favour direct ownership of equities versus something like an exchange-traded fund (ETF).

“Their core portfolios tend to be made up of large-cap North American stocks. Then we build around that, adding international exposure and fixed income to the degree that each client requires.

This is where it becomes very much dependent on their individual circumstances and timeline.

With a small portion of their wealth they’ll often take a risk, but it’s usually a calculated investment – they aren’t particularly interested in the flavour of the week.”

Daniel Nolan, certified financial planner, IPC Securities Corp., Ottawa “For people of average wealth, their first priority might be growth, second might be preservation and third might be income. With high-net-worth investors, preservation of their money – or the bulk of it – is paramount.

“But I wouldn’t say they’re conservative. Because they’ve got large chunks of wealth, they can divide up those assets. One chunk could be moderately managed, and they would still have a chunk that allows them to continue to make money. One of my top clients buys up other businesses and properties, but we also make sure he chunks up assets in a very modest-risk investment account.

This is where he’ll pull out future income.

“What do wealthy peoples’ portfolios look like? Stocks and bonds for sure – you typically see a nice mix of blue-chip, dividend-paying stocks along with a reasonable risk bond portfolio. Real estate tends to play a part, whether it’s personal or corporately owned.

“Fully transparent costs are important to high-net-worth investors so they can judge value, and this value has to be apparent and typically tax deductible.”

Tom McCullough, chairman and CEO, Northwood Family Office, Toronto “The issue really is not what people like or what their investing styles are but rather what they need. For a wealthy family that plans to spend a lot of money each year – maybe they have several university-age kids studying in the United States and they plan to build a cottage or start another business – we would focus a good portion of their investments in something that’s not locked up for several years, so maybe cash or short-term bonds.

“For investors who are spending less and want to build legacy money to leave their children, there’s more room for illiquid investments with higher returns, such as private equity, infrastructure and real estate.

“High-net-worth individuals are definitely interested in investments that are intriguing, but the question we ask them is: Is your portfolio for entertainment?

Sometimes, we have to talk them down from things that are fun, or we designate 5 per cent of their portfolio as play money.

“Sometimes, they come in expecting a 25-per-cent return on their portfolio – similar to the return they got from their business. The reality is you can’t get significant capital growth out of the markets these days, so people have to be reminded that if they want to grow capital significantly they should try to start another business, or we should build a portfolio full of direct investments in businesses. We have some clients who have done this, and we’ve helped them find a private-equity manager to stay on top of these investments.”

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